Discussion of Guvenen, Kuruscu, and Ozkan’s “Taxation of Human Capital and Wage Inequality: A Cross-Country Analysis” Kjetil Storesletten Minneapolis Fed NBER, November 19, 2009 Storesletten (Minneapolis Fed) Discussion NBER, November 19, 2009 1 / 11
GHO (Guvenen-Kuruscu-Ozkan) summary GHO: ◮ Does taxation affect human capital accumulation? ◮ Countries differ in before-tax inequality. How much is driven by taxation? Stylized facts ◮ Taxes are more progressive in Continental Europe and Scandinavia than in UK and US ◮ Before-tax inequality is higher in US and UK than in Continental Europe and Scandinavia ◮ 1975-2000: Before-tax earnings inequality increased substantially in the US but less so in Europe ◮ 1975-2000: Return to education increased in the US but did not increase much in Europe Storesletten (Minneapolis Fed) Discussion NBER, November 19, 2009 2 / 11
Summary (cont.) Consider a Ben-Porath human capital accumulation function: y = Ph ( 1 − i ) n h ′ = h + A j ( hin ) α Trade off time spent on generating income, ( 1 − i ) , and time spent accumulating human capital, i Progressive taxation lowers human capital accumulation. Flat taxes lowers accumulation if labor supply is endogenous. GHO add heterogeneity in return on human capital (more precisely, heterogeneity in learning ability) A j ⇒ Agents with high A j will accumulate more h . Distribution of h fans out ⇒ Taxation will mute the resulting dispersion in h Storesletten (Minneapolis Fed) Discussion NBER, November 19, 2009 3 / 11
GHO’s exercise Build a life-cycle model of human capital accumulation and taxation Calibrate model to US Compute tax schedules and transfers for eight countries (impressive!) Experiment: ◮ Assume distribution of learning ability is identical across countries ◮ Impose tax-transfer system for each country ◮ Can model explain differences across countries? ◮ Decompose effects of various taxes ⋆ Progressivity drive 2 / 3 of results Storesletten (Minneapolis Fed) Discussion NBER, November 19, 2009 4 / 11
Evidence on human capital accumulation: Success I: Cross section: Can account for most of cross-country variation in before-tax earnings inequality Success II: Time series (extension to two-factor human capital). Assume skill-biased technical change. It interacts with the tax schedule: more progressive taxes means less human-capital response and a muted increase in human-capital dispersion Political economy: ◮ Fact: more (before-tax) unequal societies have slightly less redistribution ◮ Simple median voter: more redistribution when median voter is relatively poor ◮ Possible theory (Benabou): the political power of the rich increase in their relative wealth ◮ GKO offer an alternative explanation: human capital accumulation with heterogeneity in returns Storesletten (Minneapolis Fed) Discussion NBER, November 19, 2009 5 / 11
Inspecting the mechanism Prediction I: Less human capital accumulation when taxes are more progressive Prediction II: Dispersion in human capital accumulation is smaller when taxes are more progressive Guvenen et al. (2009) examine Prediction II What about I? Problem: measurement. Storesletten (Minneapolis Fed) Discussion NBER, November 19, 2009 6 / 11
Evidence on human capital accumulation: Tertiary education Enrollment rate = tertiary students / size of population in tertiary education age Finding (1999-2007 UNESCO data): US enrollment rates slightly higher than Germany. US enrollment rates about the same or lower than in Scandinavia US enrollment rates are significantly higher than in UK and France Storesletten (Minneapolis Fed) Discussion NBER, November 19, 2009 7 / 11
Tertiary Enrollment Rates Tertiary Enrollment Rates Tertiary Enrollment Rates Tertiary Enrollment Rates Tertiary Enrollment Rates Tertiary Enrollment Rates Tertiary Enrollment Rates Tertiary Enrollment Rates 1 1 1 1 1 1 1 on tiary enrollment / 18 ‐ 21 population rollment / 18 ‐ 21 population Tertiary enrollment / 18 ‐ 21 population Tertiary enrollment / 18 ‐ 21 population population / 18 ‐ 21 population 0,9 0 9 0,9 0,9 0,9 0,9 0,9 Denmark D Denmark Denmark Denmark Denmark Denmark k 0,8 0,8 0,8 0,8 0,8 0,8 Finland Finland Finland Finland Finland Finland 0,7 0,7 0,7 0,7 0,7 0,7 France France France France France 0,6 0,6 0,6 0,6 0,6 0,5 0,5 0,5 0,5 0,5 Netherlands Netherlands Netherlands Netherlands Netherlands 0,4 0,4 0,4 0,4 Norway Norway Norway Norway 0,3 0,3 0,3 0,3 Sweden Sweden Sweden Sweden 0,2 0,2 0,2 0,2 0,1 0,1 0,1 UK UK UK 0 0 0 US US US 1999 2000 2001 2002 2003 2004 2005 2006 2007 1999 2000 2001 2002 2003 2004 2005 2006 2007
Gross enrollment ratio for tertiary education (Barro-Lee'93 & UNESCO) 0,9 0,8 0,7 0,6 USA oss enrolment ratio 0,5 C14 0,4 Sweden Gro 0,3 0,2 0,1 0 1970 1975 1980 1985 1990 1995
Engineers pr 100,000 80 70 60 50 Sweden 40 USA, B+M USA, Bachelor 30 20 10 0 1971 1980 1985 1990 1994
Evidence on human capital accumulation On-the-job training ◮ Becker: With competitive labor markets firms never finance workers’ accumulation of general skills ◮ Acemoglu and Pischke (EJ, 1999): Wage compression make it worthwhile for firms to finance workers’ accumulation of general skills In line with the predictions of non-competitive theories, the incidence of company-provided formal training appears to be higher in Europe and Japan than in the United States Share of young workers receiving formal training France Germany Japan US ◮ 24% 72% 67% 10% Storesletten (Minneapolis Fed) Discussion NBER, November 19, 2009 8 / 11
Evidence on human capital accumulation Aggregate data: Suppose all countries have the same Cobb-Douglas production function, the same TFP level and the same capital taxation ◮ All differences in labor productivity is driven by differences in human capital ◮ GKO 1: Countries with relatively progressive taxes should have lower human capital and hence lower labor productivity ◮ GKO 2: Countries that increased tax progressivity should fall behind in human capital and hence in labor productivity Storesletten (Minneapolis Fed) Discussion NBER, November 19, 2009 9 / 11
80 80 80 80 80 80 80 70 70 70 70 70 70 70 60 60 60 60 60 60 Denmark Denmark Denmark Denmark Denmark Denmark 50 50 50 50 50 50 Finland Finland Finland Finland Finland Fi l d France France France France France 40 40 40 40 40 Germany Germany Germany Germany 30 30 30 30 Sweden Sweden Sweden Sweden 20 20 20 20 UK UK UK 10 10 10 US US US 0 0 1970 970 972 1972 974 1974 976 1976 978 1978 1980 980 1982 982 984 1984 986 1986 988 1988 990 1990 1992 992 994 1994 996 1996 1998 998 2000 000 2002 002 2004 004
60 60 60 60 60 60 60 50 50 50 50 50 50 50 Denmark Denmark Denmark Denmark Denmark Denmark 40 40 40 40 40 40 Fi l Finland Finland Finland Finland Finland d France France France France France 30 30 30 30 30 Norway Norway Norway Norway 20 20 20 20 Sweden Sweden Sweden Sweden UK UK UK 10 10 10 US US US 0 0 970 1970 972 1972 1974 974 976 1976 1978 978 1980 980 1982 982 984 1984 1986 986 988 1988 990 1990 1992 992 1994 994 1996 996 998 1998 2000 000 2002 002 2004 004
Conclusion GHO: Ambitious exercise comparing tax systems in a rich macro model Key success: model consistent with BEFORE-tax earnings inequality rising more in the US than in continental Europe. Mechanism: Progressive taxation lowers return to human capital accumulation ⇒ more accumulation and larger heterogeneity in human capital in US No support in data for the implication that human capital is substantially higher in the US than in e.g. Scandinavia. No evidence that human capital in the US is growing faster than in Europe Is it the right model of human capital accumulation and inequality? Need a mechanism that keeps average human-capital accumulation high in Europe ◮ Example: Subsidized education plus wage compression ◮ Message: progressive taxation does not hurt growth as long as it is complemented with wage compression and free college Storesletten (Minneapolis Fed) Discussion NBER, November 19, 2009 10 / 11
Alternative story? Krusell, Ohanian, Rios-Rull and Violante (2000): 1970’s: Rising supply of skilled labor suppressed the skill premium 1980’s: Capital-skill complementarity + falling equipment prices = rising skill premium ... despite continued increase in supply of skilled Lindquist (2005): ◮ Repeat KORV’s exercise for Sweden (detailed data from manufacturing). ◮ Accounts for flat college premium in Sweden after 1980. ◮ Mechanism: Sweden saw much bigger increase in supply of college-educated workers Storesletten (Minneapolis Fed) Discussion NBER, November 19, 2009 11 / 11
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